No, not everyone should do it. There are those who are like grasshoppers, never thinking about tomorrow, and yet, will show up at your doorstep after winter blows in, hoping for a helping hand, and wishing for a free meal.

Pretending.

Flip through your remote control and count the channels. Shows about sports, fashion, sluts, comedy (not funny, but names are names,) history and news. It's pretend time, where we aren't supposed to know about math, and that we're increasing the amount of money that our governments are committed to spend, without any kind of concomitant in revenue or growth in the gross domestic product.

It is true that taking thirty percent of my net worth and putting it into gold is risky. I'm still betting that the seventy percent of net that I hold, through equity, will be worth more in the long run than it is today. Yet, most of my equity position is in a company where I'm the sole stockholder, so it isn't fair to compare stock in my company with publicly traded stocks. Believe me, I'm going to be the first guy that knows whether or not my stock is going up, or down, in value. But here's the kicker:

If gold drops, my company's equity value is going to go up.

I think that's going to happen ceterus paribus. As an entrepreneur, my job is to surf the profitability of commerce, regardless of the revanchist horrors of central planning extremism. I have enough cash to ride out, at current prices and contracts, all of my obligations for at least one year, without bringing in an additional dollar of revenue. And I think my business model is a sound one. That means paying all my employees, all my bills, repair and maintenance costs, bar bills and golfing bets. For a year. And, a small horde in gold.

There is no "fiscal cliff."

There is mathematical certainty.

Until we find the difference, we're just pretending. Do what you're comfortable with.

Monday, December 3, 2012

I've heard such solemn men as U.S. Senator Schumer refer to market activities as being "gambles." As if gambling were a bad thing. Gambling is a necessary component of market capitalism.

Price Discovery

What is a thing worth?

Before I attempt an answer, let me ask you, what do you know about what determines price? I really want to know what you think determines price. A discussion of value without an understanding of the determinants of price is a discussion of art without sight, sound, taste, touch or smell.

Let us have a discussion of what determines the price of a thing.

Unless we have a discussion, we can never understand how far we've lost the concept of price in determining how we behave. When anything is free, there can never be enough of it.

Monday, November 12, 2012

While Portland is extremely weird, its revenue that drives programming, not the other way around. And there's simply more money to be made giving listeners what they want, than what they should have.

Bob Dove is no idiot. Given the political cant of the Portland metro area, having the leftist rant available seemed an interesting experiment. Until, that is, you get down to "compared to what?" In this case, more profitable radio stations.

Just ask the bar owner who used to offer popular hippy music, without a cover charge. The hippies come in, order water, and sit around. (What they do best.) Hard to provide "what the people want" when there isn't a way to monetize the service.

The campaign to "reverse" the decision is going to fail. There simply isn't a hammer out there to wield over ownership and management. The programming was offered long after the demise of Air America.

The argument from the takers will be that KPOJ has been "plenty profitable." I hope somebody posts something somewhere about opportunity cost. What it is. What it means.

Wednesday, October 10, 2012

"There's
a new breed of business in Oregon - businesses that operate for profit,
but also seek to foster positive social and environmental impacts. I'm
proud to tell you that I will introduce legislation next year that will
establish a new kind of legal Oregon corporation - the B-Corp - that
will help these unique for-profit businesses thrive and succeed."

Thursday, September 13, 2012

I've blogged about this before, if not here, then at my old place, "oregonguythings.blogspot.com." I had to abandon the old diggs when comments there led me to suspect that someone close to, or attached to, the District Attorney's office, or leaders in the local Prog/Democrat apparatus threatened me with a smear campaign. My first response was one of anger. The second response, was caution.

I removed all comments, and shut the site down. Migrated here. Yes, when you have a business that deals with the feds, standing up for ones rights can be disastrous for ones business. I'm too old to want to take another path to prosperity. And renewing old authorizations can become problematic. I moved here to avoid those problems.

So, if I haven't talked about this on this site, you can go over to the old site and read what I've written earlier. This President is not lying when he says he seeks the transformation of our nation.

Human dignity, and human rights, have been sacrosanct to Americans. Building upon the broken premise of the League of Nations, the United Nations was born. Creating a space for communication between nations, in an attempt to create a flat canvas for nations to discuss those issues that found them at odds. Headed by a council of nations that actually had the power to impose solutions, at times when those solutions were found necessary.

Joining the United Nations required passing a resolution in the United States Senate, ratifying the treaty proposals included in the United Nations charter. In fact, our nation has ratified many treaties, and all these treaties impose upon the United States obligations and responsibilities that our nation needs to meet or exceed, in order to remain in compliance with those treaty obligations. Treaties are important documents, they are promises to our allies, and injunctions against those who would either seek to harm our allies, or ourselves.

A quick reminder can be found at "Fall Out From Surrender Monkies." The differences that were important at the time, when the United Nations was pushing for new constructs for ideation of basic human rights found in the Helsinki Accords:

"The participating States will respect human rights and fundamental
freedoms, including the freedom of thought, conscience, religion or
belief, for all without distinction as to race, sex, language or
religion."

Freedom of thought. Freedom of conscience. All these freedoms enunciated through our freedom of speech. Because, if you can't say it aloud, the freedom to dissent, the freedom to hold your own opinions or thoughts, the freedom to live your life with a clear conscience between you and your Creator, none of these freedoms survive obligations to redact, self-censor, to silence.

The Middle East is in turmoil. And my President travels to Las Vegas. I invite your to re-visit, The Long War.

It's getting a little old to continue to blame Bush. But, that is easier than gaining an education. And President Equal Opportunity is wearing on my nerves. I'm glad he got the degrees. I just wished he had instead, received an education.

Wednesday, September 12, 2012

Let's talk together, you and I, with complete certainty that no one will listen to us.

We view our government as an insurer of the future. There are things a government can do, that no individual can. Even if there were an amalgamation of interests that would lead a large group of individuals to come together, at a certain point, the continuity of such a libertarian association would put at risk the ability of any force, as an insurer of the future, great harm in its ability to meet the goals of that association.

National defense is one of those large, governmental associations that is poorly served by any thing less than a total commitment of ones government. I remember writing a paper back during my undergraduate years, to that effect. Cain slew Able.

Crime occurs.

Had you read Locke's Second Treatise, you would be better prepared for the arguments that I may end up relying upon in this particular essay.

When Cain slew Able, the risks Cain felt at the moment were certainly small. His father knew his brother through touch. Cain could replicate the touch, using a sheepskin. The story has always left me wondering, but, the story was never the message. Cain felt he could get away with the murder of his brother.

Today, President Obama is killing Able, and he lives in sheeps' clothing. The reality of the last twenty-four hours is unbearable. We live, you and I, in a time, without Presidential leadership. President Carter was a weak president, but President Obama is the non-existent President. Our President has no training in business, no training in international affairs, no training in administration. He has belief? Certainly. Noam Chomsky is a part of personal cadre. There are elitists that ascribe to this particular President's statements and views.

As I write this, it is five o'clock in the morning in Egypt.

If you were to engage in any type of description of what a "nation" would be, you would be well advised to look at nationalism, prior to 1797. Or, 1775. These two dates are important, and if you were able to tell anyone how these two dates are principally different, you'd be well on the road to describe how the changes in just a few years, and a continent away, are so important. America was a great divorce.

Europe was the whore bride we divorced.

America was the first state established with the view that all men are created equally. You and I will never have to bow to any other. We can be wrong in our beliefs, and yet, our beliefs are just as valuable as any other uttered belief. Imagine, a country where one can utter his beliefs, without penalty. This particular American nuance is under attack, from special interest groups, from the Democrat Party, from Islamic fundamentalists. Your ability to say what's on your mind, no matter how right or wrong, is an American Right. Freedom of Speech is the central belief of our Nation, Science, and central to a model of governance.

Galileo wasn't a one-off. Simply ask yourself why, Man-made Global Warming advocates are using the nomenclature of Nazi Germany to attack skeptics of MMGW? (AGW.) Where has civility left, and what has been placed in it's stead?

Freedom.

Simple.

What comes to mind is your opinion. If you view things from a lens of preconception, chances are, you will evaluate everything that you apprehend as conditioned by your viewpoint. I'm not the enemy of preconception. You've determined a lot of the world based upon your experiences of the world, and those experience have determined your preconceptions. Unless you tell me how you've come to a different place in your word view, I can't begin to start a conversation that allows us to find how, in so many words, your different view of the world is inconceivable in mine.

In my world, I create meaning. From Descartes, to Hume, to Kant, to Sartre, there aren't any inconsistencies. We discard that which is without value or meaning. And here is my reduction: there is no greater value than the value of the individual. Any system of thought that relegates the individual to any type of group thinking is a sham.

Daniel knew this. I know this. No person, no government, no ideology, can make me believe that which I find intellectually abhorrent.

You cannot make me believe that which I find is intellectually dishonest.

I didn't know until tonight that there was a new channel on DISH TV.
It's called, "The Blaze."

Right when I called my News Director to urge him to include more international news in our local newscasts.
Newspapers and network television news shows aren't talking about the terrible news from the last couple of days. They can't. It's just too terrible.

Thursday, September 6, 2012

Just as everyone has health. Some person's health is better than some other person's health.

Fortunately, everyone has an opinion, too.

Some opinions are better than others, but that doesn't stop some from sharing theirs. In fact it seems that the weirder some ideas are, the more likely they are to be expressed. In certain venues, the weird becomes accepted world view. I think this is what Democrats refer to as knowledge-based policy. Republicans and libertarians are so yesterday, what with their reliance upon God given and nature given rights. Democrats don't need to rely upon God and Nature. They have brainy ideas.

This is what they call Science. And Science trumps religion because it's knowledge-based. (Anyone for a brief tautology?)

Anywhoo, here's Peter Schiff. A smart guy. I've posted Schiff before. If you have a chance, take a look at some of Schiff's warnings about the credit markets prior to the current economic malaise. Congress was warned, The White House warned Congress. And yet, Democrats in control ignored the warnings. And now, blame Bush.

So, don't be shocked by the economic illiteracy of the Democrats interviewed by Schiff. I found this over at the Real King of France's place.

Wednesday, September 5, 2012

There are certain threads of the current political debate that are interesting. The latest thread is coming from the DNC convention in Charlotte. According to the Democrats, the issue is one of "you're on your own," and "we'll take care of you."

Choices are important. When you make a choice, you're on your own. If you want fried eggs, don't boil them in water. There's no really good way of back-tracking eggs.

Thursday, August 30, 2012

MSNBC isn't an honest dealer when it comes to news. Whoever is serving as producer of their news division would be fired if they worked for me. The Executive Producer would be pounding the pavement. Inserting Steve Schmidt--purportedly a "Republican Operative"--in their attacks on the Republican Party does more to solidify my opinion that MSNBC has totally left the rails.

Don't cover up mistakes. Provide some analysis of what policies mean. That's what "news" organizations do, or should do.

How did Sarah Palin get so excoriated by the press? Reading about the last election cycle, one name keeps popping up. Steve Schmidt.

I don't think I'm alone in wishing that Mr. Schmidt would have a "come to Jesus" moment, and admit his own hatred for ideals and beliefs of which I subscribe. MSNBC is a faux "news source." Steve Schmidt is a faux conservative.

Monday, August 27, 2012

Interest rates are the most important rates that exist.
The best known, and most followed rates are the Federal Reserve Rate and the LIBOR.These rates are amongst the least risky rates in the Western hemisphere.

To access the Fed rate, you must be a federally chartered bank. There are a lot of banks that look to the unaware consumer as a "bank." But there are significant differences between federally chartered banks, and state banks.

Reserve rates for banks are set by the Fed. Reserve rates are important, because the amount of liquid reserves--cash, in most cases--determine the amount of money a bank is able to use for investments. Or, other uses. Like, loans. Banks are being regulated today at historically stupid levels, so, banks are using their funds to create the greatest possible returns, with the lowest possible risks. Purchasing federal notes are currently amongst the lowest risk assets that a bank can own. So, when an auction for notes comes up, banks are buying. And, with the current level of repo coming from Treasury, buying federal notes actually results in a negative interest rate.

Between the Fed and Treasury, billions of dollars have been created; hundreds of billions. Since the U.S. has become the greatest holder of U.S. debt, fiscal policy has overwhelmed monetary policy. When you hear that the U.S. has a "fiscal cliff," part of the problem is that we have a fiscal (spending from the federal treasury) problem, and the other part is, there is so much cash in the system--held in part by Treasury--that when the economy begins a comeback, there is going to be "so much" cash that the system won't be able to halt the rush to inflation.

Interest rates are the costs associated with choosing between cash and enterprise. Interest rates also have a distinct characteristic; interest rates measure risk.

Today, the demand for cash is, and has been, at historic lows. Just as a sideline note, the current DOW levels, when taken as a measure of economic activity are deceiving, since there is so much cash in the market, that traders, flush with cash, are chasing stocks, looking for the greatest, short-term returns. We're building a new bubble in intangibles. Yet, when I last checked today, we're only three days from returning to what I believe are long-term trend levels; 11950 to 12950. All the cash in the system is based upon trading. And buddy, trading is different from investment. It isn't 1928. We all know that, at the margin, trades can make you money. And trading will continue after the bubble bursts. If you want to invest, buy land. God doesn't make any more of that.

Interest rates are the cost of money.

It wasn't that long ago that Oregon had an usury law. I think that under Oregon's usury law, lending institutions were limited to an interest rate of twelve percent. The Oregon State Legislature had determined--in order to protect the "consumer"--that twelve percent interest rates were sufficient to lending institutions.

Usury is a word associated with evil guys, like Ebenezer Scrooge.

The problem for Oregon was, at twelve percent, a major portion of Oregonians found themselves without a credit outlet. If you were alive, and aware, during the 1980's, you know that the interest rate being offered by banks was above seventeen percent. How much lending occurred at, or under, twelve percent?

Zero.

When legislatures mandate interest rates, lending stops. Interest rates are the most important rates of any economy. Interest rates compare the costs of money. If you have money and simply hold money, the rate of interest you achieve is zero. If you have money and invest it, the rate of return can vary. Some times, the rate of return will be negative (below zero.) At times it will be positive (above zero.) Interest rates are easy to figure; given the return, divide by the investment. The larger the numerator, the smaller the denominator, the greater the return.

Interest rates determine whether or not you should borrow money. At the same time, interest rates determine whether or not you should borrow money. (H/T http://mathdude.quickanddirtytips.com/what-are-numerators-and-denominators.aspx)

The single rule of interest that I'd like to leave you with is risk. If a bank is willing to pay you a rate of interest for your deposit with that bank, as long as your deposit is less than $200-thousand, you have a basically risk less asset, with a positive interest rate.We haven't seen those days for years.

Cash, today, is a risky asset.

Why do you think that the value of gold has gone from 800 dollars to 1600 dollars?

Risk.

So, I'm done. Interest rates are the most important rates, or measure of economic activity, that exist. They are a reflection of how markets are doing--markets that produce real goods and services--and everything else. Interest rates reflect risk, which is why a 20-year old buying a used car pays a 20 percent interest rate on his loan, and a guy with a lumber yard pays 3 percent. The lumberyard guy is a better risk.

Legislation can affect rates. Simple borrowing between classes of borrowers show that a 20-year old used car purchaser presents a greater risk than a 50-year old lumberyard owner.

Social Justice demands that each is treated in the same way. Common sense determines that interest rates are a function of a market, that rely on information that changes on a daily--if not momentary--basis.

Legislating interest rates doesn't work. They are that important. The most important financial data that exists.

Thursday, August 23, 2012

There are things that old guys know. One of those things is, what a chair is for.

I own a business that helps other businesses decide whether or not they are in the chair business, or some other enterprise. These isn't as simple as it may look to the outsider. In business, what you may choose to do on the day of your founding, may not be what you end up doing, years later. IBM is one of those enterprises. I still own several Selectric II's. The finest typewriter ever built. But, within years of the Selectric II's introduction, a cheaper variant, using the Daisy Wheel was introduced. And when word processors came around, the early variant of what we would now recognize as the home computer, it was the Daisy Wheel that was used in early letter typing. In 1978, I used one of the first Wangs to put out a mass mailing piece. Remarkable piece of machinery. I could type up a letter and leave a blank field that would be filled out from a data base of names, street addresses, city and state. Garbage In/Garbage Out was prevalent at the time, since simple inputting errors would produce egregious errors, such as "Dear Mr. SusanandJamesSmith."

Being one of the first guys to put his hands on the machinery, I worked hard to make sure that my data bases were clean and clear. The Wang could only do so much. Care on data entry was an enormous responsibility, and since my client was dependent upon my skill, I only had one goal; perfection.

Typewriters were, at the time, perfect. What wasn't perfect at times was the typist.

What Wang Labs introduced was the possibility of perfection. An individually typewritten letter, to a discreet individual. Load the data base, stack in the paper, and let 'er fly! Carpal tunnel, high thee to a nunnery!

When it worked, the results were extraordinary. Personalised invitations to be a part of something greater than themselves. From a regional/national campaign. Add a blue ink "signature," and you have a personal appeal to someone who would have never expected to be singled out for attention. The Wang was brilliant.

At the same time, advances in printing technology was occurring. Machines were being built that allowed one to create fonts for ad copy that allowed one to type in copy, and end up with a tape that allowed for the first instance of "cut and paste." Aesthetics existed before, but it required an art department to produce camera ready fonts for non-standard fonts. Now, you could print up to 20 pt. tapes with your copy, and simply take a blade and move your copy around your white sheet. San serif? No problem. Peter Max?

Take a back seat.

So, for some forty years, I've been earning my living from simple things; who are you, what do you do, and what do you offer others? The field of enterprise I've belonged to has been for years under assault. Somehow, letting people know who you are, what you do, and what you offer to others is a sinful enterprise. The reduction of this process? Advertising.

Since Marshall McLuhan's book, "The Medium is the Massage," the value of truth and promise has been undermined by a Chomsky-like re-telling of fables. That is, if it is a commercial message, it must be false.

It is "commercial speech." And back in the early part of the Twentieth Century, commercial speech has found not to have First Amendment protection. I bring this up in order to establish one single thing.

Most speech is commercial speech.

It is either intended to generate a transaction, or to culminate a transaction. It's what speech does. I'm not talking about mere utterances. "How are you?" Polite, but a mere utterance. Devoid of intent, other than to recognize the existence of another. Just about anything else out of your mouth is either an entreaty to a transaction, or a response to a transaction. Have I asked you for your interest in my predicament? Have I told you of how your predicament has created a response? Non-transactional speech is pretty boring, innit? Even the "nice shoes" has a transaction in mind.

So, let's talk about Windows.

I don't mind that Microsoft has a need to generate revenue. We've moved from Smith-Corona to Windows or Apple and printers. I haven't tried to purchase a typewriter recently, but something tells me, there are still typewriters being made and sold. There are "apps" available, to make your keyboard typing sound like the classic typewriter. How coochy is that?

My point is, why does Windows have to obsolete their products? Why can't we purchase a product, software, and not be able to rely upon that software to do a job? I quit buying HP printers when, after a two-year period and and upgrade to XP (which I didn't want to make), I found that my Desktop Jetprinter was no longer supported by HP.

I buy office equipment. Thirty years ago, when you bought office equipment, you expected the lifetime of that equipment to be 15 to 30 years. Today, when you buy anything, you cannot be sure of the lifespan of the product you're purchasing.

Which is why I like chairs. I want to upgrade a chair? Buy a pillow.

But I know why I bought a chair. Someplace to plant my butt.

There is a whirlwind of "new" products and technologies that are being offered on the Market these days. Perhaps, a maelstrom. It isn't the first time that a lot of new, competing technologies have been offered. Just look at the late '70's and early '80's and word processing. A Wang machine cost tens of thousands of dollars. At the time, it was cheaper than paying a pool of typists to re-create a single letter. And would work around the clock, without complaint.

Cloud computing is not "just over the horizon." Too many of my friends are moving their businesses to the cloud. Which, to me, is kind of ironic.

When I had my first Trash 80, all of my programs were run off discs. That is, they weren't "resident" programs. And I could do a lot with under a meg of ram.

Because the app wasn't resident on my system. With a dual disk drive, I could work with a program on one drive, and write to the other. So, cloud computing is kind of a laugh for me. R/W processes could/should be faster, and yet a person should be able to maintain proprietary control over his own machines. The drive for cloud computing is simply an hat-tip to an older technology, that promises greater control over personal privacy.

I recently bought a server from a company that wanted to move to another location. I don't have it installed yet, but what I'm hoping for, is a central place where apps can be installed and accessed with a ring with a much lighter OS. And firewalled. Why would you ever put your data in a place that wasn't under your control?

Tuesday, August 21, 2012

What Senate candidate Todd Akin said about rape was based upon dumb. As I've been able to drill down onto the "scientific evidence" that women who are/or were raped under duress failing to conceive is borne out by the seminal research of some Middle European scientist, probably a Nazi, it isn't the first time that I'd heard of such research, or the results reported by whatever sketchy reports are coming in on the Todd Akin statement.

I'm pretty sure that Kurt Vonnegut wrote about this.

Of course, Kurt was a novelist, so he didn't have to adhere to the truth. Not a literal truth. Suffice a figurative truth. A truth of worthy intent.

What I am amazed about is the clinker between the mis-statements of Akin, and the voting record of President Obama.

Sperm is sperm. Babies is babies. And the anti-abortion argument runs toward the ethical beginning of human life, which I believe begins at zygote. The miracle of life is simple. The male and female of a species comes together in coitus, and life begins anew. For me, there is no greater miracle. Imagine, all these disparate chemicals, the human body, able to discriminate between air and oxygene, the aglomeration of molecules, iron, water, calcium, all ending up in this standing form that we call...us.

I've listened to Todd Akin's speech about "legitimate rape," and yet don't understand whatever it was that he may have intended to impart to the casual listener. Speaking abstractly, I can be called for whatever comes off as gibberish to the casual listener. I have gibberred.

I'd only ask you to compare and contrast the comments of Todd Akin with the vote of President Obama. However egregious Mr. Akin's comments may be interpretted, or construed, I'd ask you how you would condition the vote of our President, to condone the death of a child who was born, following a botched abortion?

In Oregon, the fetus doesn't gain personhood, under law, until birth. I think this is crazy. If my then pregnant wife had been murdered while carrying either of my sons, then I would have wanted her murderer to pay, not only for her death, but for the death of an unborn son. Even though my sons were unborn, I knew that I was expecting, and waiting for, their births. God had given me sons. (You could even see their little pee-pees!)

President Obama voted to allow the death of born children. Mr. Akin said some dumb stuff about rape.

I know that many would condemn Mr. Akin's campaign and ask that he evalutate his electability in the face of the response his comment has generated. If he decides to remain in the race--and I think that taking one for the team may be the best political outcome for the party--I hope that every dime and dollar that he has reminds voters that while off-base, wrong, or ignorant, he believes that life is the most precious commodity on Earth. And unlike President Obama, who voted to allow for the termination of living children, he erred on the side of unborn life.

Yes, I know I'm letting you know that I'm an intellectual troglydite. If you've been here before, you should have already gleaned that truth. I'm not as smart as you. And never intend to be. But there are fundamentals. Life either begins at conception, or it don't.

Tuesday, August 14, 2012

Hey, good news, sports fans! Oregon's unemployment rate is up two percent!

It's pretty cool when the unemployment rate increases more quickly than the growth in revenue of the private sector. That means we're spending more federal and state tax money as a percentage of state outlays!

Monday, August 13, 2012

I've danced around a lot of issues that involve insurance companies; things like how they were started, early intervention by governments, but one of the elements I've merely hinted at is one of the most important aspects of insurance. What do insurance companies do with the money they are paid to protect their customers from risk?

Insurance companies, and, especially health insurance companies, are among the most regulated of industries in the United States. Politicians know when to take advantage of their electorate. Insurance was several hundred years old, when the Great Depression hit. And yet, prior to the Twentieth Century, few people ever had need for insurance. Hedging against risk was a novel idea for most people. When it came to medicine, having a doc within miles of your home was rare. Much closer were people who were experienced with injuries, and their personal experience in how to treat the injuries presented. Health care wasn't an expression one would have heard, an hundred years ago. Doctors? Sure. But most "doctors" were simply men or women of experience. They didn't have any form of recognized training. In terms of what we refer to as "science," medicine was distinctly unalloyed with any form of scientific inquiry that we would refer to today. Gentlemen scholars, such as Joseph Lister, were ridiculed by his contemporaries.

The science, it seemed, was settled.

Disease was not a thing that any company would want to address, in terms of offering insurance. Disease, for the most part, was an enigma.

By the mid-20th century, insurance had matured. When we look at the procedures being offered by modern medicine in the early part of the 20th century, most of what we viewed as the domain of medicine was the treatment of trauma, and the treatment of disease. It wasn't until the Great Depression that insurance was widely adopted. It was a sop to the wage limits being imposed by the government. Can't pay a man what he's worth? Give him an incentive. Health insurance to cover you, and your family. And we'll pay for it.

One of the greatest, unintended consequences of moral provision by any government.

The Grange Movement spawned insurance during the Depression. Farms were going under, and legislatures were looking at ways to compel damages. Protection came from insurance companies. If you had insurance, you had a company on your side. With enough coverage, you actually had an advocate on your side, willing to provide for legal counsel if, or when, you found yourself on the wrong side of the legal ledger. Protection became a racket in the 1920's and -30's. "It would be a shame if your business burned down" was a hellavu closing line, when it came to protection.

There were, at the time, associations that were created, in order to counter the worst of the protection rackets. Companies were formed to afford insured parties protection against the protection rackets.
And loss, but if you lived in a metropolitan area, chances are, you learned from your friends and neighbors that it was better to find a way to indemnify yourself against loss, than to fall prey to the rackets.

The demand for insurance was increased due to these types of forces; exposure to risk, protection against loss, and external forces that would create economic havoc. While all this is going on, during the 30's, a the same time, the number or tortuous claims was increasing in the courts system. As racketeering rises, tortuous claims were raised, too.

By the 1940's, insurance in the United States was on a course of expansion never seen in a single industry. Millions of young boys were exposed to insurance for the first time, through their service in the military. The idea that ones death could result in a payment to ones kin was an unheard of sentiment. When the mule kicked you in the head and you died, you died. Simple. Your kin either moved in to help you farm, or you eventually would lose the farm. The ebb and flow of gain and loss isn't a recent chapter of the human condition. It's been going on for millennia. Bad things happen to good people.

What was created was the first mutual fund that was created without restriction.

Money began pouring into insurance companies, who were more than willing to provide coverage, with limits to the insured. Medical, health insurance was a new commodity, one that hadn't existed previously, and therefore, had no externally imposed constraints upon the companies that issued the coverage. The simplest way to make money for health insurance was to sell policies. And then take the money. And then take more money.

If the beneficiary of a health insurance policy got ten percent of the value of the policy's cost, how could he or she complain? The cost was borne by the employer. The benefit was a delayed payment to the employee. The disconnect between the payer and the beneficiary was a total disconnect. No matter what the amount the beneficiary received, it was above and beyond the costs that an uninsured purchaser of health care would have received.

For a guy with a family, finding out that an insurance company would pay twenty dollars for the cost of putting a cast on his son's broken arm, that benefit, which he never felt the cost, was immeasurable.

But health insurance wasn't driven to compete. It was coddled and enhanced.

It was never in the health insurance industries portfolio to deal with health care costs. Not that it couldn't be.

The industry was never set up to deal with anything more than their profits. Not a bad thing. So, what stops an ethical company from getting into the health insurance market, and driving the costs of health insurance down?

Wednesday, August 8, 2012

A friend of mine is going through a bad patch--cancer--and I've had to spend more time taking care of things than I would have had, normally.

Business is still extremely touchy, for those of you who are making their first visit here, I live in a town of less than six thousand people. When you live in a rural community, there is great deal of bifurcation socially; those who have elitist views, and those who only want to be left alone. Life is bad enough without having the know-it-alls telling you what to do, or what to believe.

Hope and change is alive in this small town.

If you're an employee, chances are you're a hope and change person. If you have a business in town, chances are you aren't. Under Oregon law, you cannot tell your employees what your political views are, or how the policies of any particular political view may impact your business negatively.
So, we can't, under Oregon law, tell the folks who rely upon my business for their livelihood, why the policies that are being advanced by Democrats make it harder for me to provide them with their jobs. Nor, can any Oregon employer.

In Oregon, we do things differently here.

Back to insurance.

Had a comment from Jardinero1. "Say what you will about fractional reserve lending and I may agree with you. But, it's a gross simplification to equate insurance companies with banks."
Guilty. And thank you, Mr. Jardinero, for finding the obvious.

The reason why I refer you to the banking rules is to introduce to you one of the realities of insurance; you don't have to have all the cash your insured send you at any given moment.
If you have an hundred insured, paying you an hundred a month, against a policy that will pay out one thousand dollars, how many of those payments must you hold?
Ten. That thousand dollars. If you have an hundred insured, how likely is it that any of those insured will make a claim upon their insurance?

Face it, the likelihood of calling your insurance company to file a claim is relatively low.

Car insurance?

Higher likelihood.

Flood insurance? Close to nil?

Health insurance?

Well, here's the conundrum.

Health care has a higher degree of dispersion than any other form of insurance. What is the likelihood of your finding yourself in need of medical care? Is it different between 6am and 7pm, or 7pm and 6am? Is it more likely to be found Monday through Friday than Saturday-Sunday? When you're an old guy, finding yourself with a temperature of 102 is less likely to raise an alarm than when you're a 36 year old father, with a child with a temperature of 103. Old guy, 102, spend some time in bed and take fluids. Child? 103? You're going to make a call.

If you don't have a Primary Care Physician, who do you call? I have a Doc. I don't bother him much. He does check his voice-mail, so, if I have a problem, I can reach him within hours of leaving a message. He's a good doc.
If you don't have a primary care physician, you are just like the guy whose car is acting up, looking for free advice as to what you should do to get your car working again.

Your probable solution? In an emergency, you're going to end up in the Emergency Room of your local hospital. The most expensive place in the world to deal with a medical problem.

Me? I take my car in every three thousand miles. Care and maintenance for my motor vehicle is fairly inexpensive. But only because, I write the big checks, when needed. The transmission on my car went out. I could have bought a re-built tranny, but my mechanic explained why I should replace my transmission with a new transmission. That was expensive. Not as expensive as a new car, but expensive.

There are different degrees of urgency that you will face as you go through life.
If you are broke, and facing the possibility that you won't have a car to drive you to work, take care of the shopping, moving the kids around, finding that you don't have a transmission that works leads you to several alternatives; buying a new POS, repairing the tranny yourself, buying a re-built tranny, or in my case, buying a factory replacement. There is a wide range of possible outcomes based upon your choice.

If you buy a new POS, you've still got the old iron sitting in your front yard, or sitting somewhere. If you are clever, and have the tools and friends with the right equipment, rebuilding isn't necessarily a bad idea. But most shade tree mechanics aren't able to rise to the level of mechanic necessary to pull it off.
Buying a factory tranny made sense, since it included all the computer upgrades that were available for the car I own, plus, it renewed the drive train warranty of my car. It was a win/win for me, although it was the most expensive alternative.

Amusingly, I recently received a call from a fellow, looking for information about an after-market automotive warranty plan. You've heard the ads, haven't you? Why pay for fixing your car? Let insurance do it?
What the caller had found out is, that attempting to insure your vehicle against the cost of repairs didn't have the success that he had hoped. He was surprised. Drive an older car, and the chances that you'll need repair, a)increase or, b)decrease?
You make the call.

What do you think is more likely? As a car gets older will it need an increased amount of repair, or a decreased amount of repair?
I don't find it shocking that the coverage for used vehicles is limited. And, in this particular case, the amount spent by the man who called me to provide himself "insurance" would have gone a lone way toward covering his repair costs. Without insurance.
Which, it turns out, didn't cover the costs of his repairs.
When you buy insurance, what is it that you're buying? Insurance is a form of derivative financing, that offers itself to cover costs when certain conditions are met. From investopedia, "Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes." This is what insurance is. An hedge.

That is, each of us, most of us, are involved in buying derivatives on a daily basis. Without a derivatives market, there would simply be too much risk for any of us to go into business. Not simply to protect us against loss, but to protect us against claims. (F***ing attorneys.) Even if we appropriately conduct ourselves in our business, there is no guarantee that an attorney will attempt to file a tort claim alleging misconduct. When your insurance agent tells you that you are insuring yourself against the unknown, make sure he means what he says. Tortuous claims can kill your business and leave you with nothing more than the skin on your back. And, we're not yet talking about "health insurance."

When you give your money to an health insurance company, you're buying yourself protection against future harm. The quality of that coverage may differ from policy to policy, from company to company. I've several insurance companies that I work with. Those companies have track records of performance. I would suggest, that most of us never question the reliability of the insurance companies that we give our money. We look for bargains when it comes to insurance. What kind of value do you allow yourself to purchase, when you're sole concern is the cost of that value? Didja ever wonder why there is so much criticism about the coverage one purchases, how that coverage didn't satisfy the purchaser, when it is discovered that the sole determinant of insurance was its cost?

Purchasing insurance, of any type, is an important contract. And you need to see it as a contract, between you and your insurance provider. The quality of your insurance is indeed, related to the quality of the company providing you your insurance. There is a progressive insurance company that advertises a great deal. I would avoid that company at every turn. The cheapest is not the best. That a single insurance company is the largest advertiser in the United States wouldn't be, for me, its greatest benefit.

Why is it that companies are able to offer you "discount" rates? Would you shop for "discount" dentistry? Discount clothes? Discount shoes?

I own two pair of shoes called brouges. Wingtips. I paid more than two hundred dollars for these pairs of shoes, each, twenty years ago. I still wear them today. Purchasing a thing of value has a worth greater than its cost. Buying quality is important. Buying cheap, or shoddy, is a waste of money. So, too, with insurance.

Purchasing health insurance is similarly worthy of this same type of criticism. Unfortunately, in an attempt to protect us from ourselves, government has stepped in to assure us that we can't purchase the type, kind or quality of insurance that we should be able to purchase for ourselves. Why is insurance so expensive? Because, legislators have told insurance companies that they cannot make rational decisions about the costs of insurance, which would depend upon who purchases said insurance. According to a certain political view, it is unfair for someone in a higher risk pool to pay a higher price for coverage. Once you break price from risk, you increase costs for the lower risk pool, while reducing costs for higher risk pools.

Insurance companies never complained.

Why would they?

Thank about it; when you live in a world where politics determine your costs, as against the costs of your competitors, what disadvantage have you, when mandated costs are created for all participants in the market? Zero.

If you provide a service that has mandates, the mandates have to be viewed as zero costs in terms of competitive advantage. In terms of market forces, it is, of course, insane. But politicians know, that if men could buy insurance from insurance company A, and women could only purchase from insurance company B, that women would pay more for insurance than men.

Government can level the playing field by requiring all insurance carriers to provide certain types of coverage to "all" insured, whether they are male or female. It's simple theft through law. I'm not a woman. But, if I want to purchase health insurance, my coverage will cover the same medical issues, abortion, birth control, pregnancy, mental health, as if I was a woman. Because, politically, it's death to point out that the reality of the world is, it costs more to insure a woman than it does to insure a man.

But women are unwilling to cover the costs of their own healthcare. It's easier for them to claim that their healthcare costs are discriminatory, and therefore are the burden of the entire society of which they belong. This came across my desk a couple of days ago:

"It gives the woman the decision to decide what her family size will be. It gives her control over her life."

What was the topic? Abortion and birth control under the Affordable Care Act.

The government paying for abortion and birth control "...gives the woman the decision to decide what her family size will be. It gives her control over her life."

Think about it.

We have a political class that has determined that women who can't figure out that having sex is the single, greatest determinant of pregnancy, have a right to depend upon their government for dealing with their terminally stupid decision to have unprotected sex is a form of "control over her life"? Are you serious? Do you view a woman's ability to abort a child with the same level of intellectual clarity when one is suggesting taking the life of an unborn child? If a woman was actually able to decide what her family's size would, or should, be, or wanted to gain control over her life, wouldn't one of her first decisions be, whether or not to procreate? To fuck? To make babies?

Insurance companies don't care. They are in on the fix. Cost controls? Check. Limits to care? Check. Free abortions and birth control? Check.

How does all this come about, without interference? Most people don't know where insurance companies make their money. And, most people don't know that the regulations over insurance companies really don't have anything to do with how they make their money, or how their costs are allocated.

Hopefully, I can wrap this damn thing up after another post. But, getting back to the comment of Jardinero at the top; yes, it was a simplification to compare fractional reserves in banking to the reserve components of the insurance industry. But, Mr. Jardinero, can you tell me why the insurance industry is an even more wild card in finance?

Sunday, July 29, 2012

I've attempted to place into conversation a couple of concepts about insurance, found in Insurance, Insurance II, and Insurance III. Regulatory costs are those costs forced upon insurance companies by regulatory agencies. There are two types of regulatory costs; internally generated costs and externally generated costs. In Insurance II, I bring up the model of insurance that to many serves as the pure model of insurance; Lloyd's of London. LL was the paradigm of insurance to many of us for years. It was a market place of investors who would decide whether or not to accept the risks posed by your activities, originally maritine, but later, for any associated economic activity. If you listen to reports about economic activity, what you may hear from time to time is the expression, "to short" your investment. Insurance companies attempt to compete for your business based upon shorting positions. They "buy" the cost of replacement of an entire vessel--in the case of maritine insurance--at a level lower than the actual cost of the vessel, in order to create a lower cost of coverage. Basically, this drives down insurance costs, as investors are willing to take greater risks against downside, in order to gain the premium to insure the vessels at question.

How is it that brilliant men, smart investors, great business men are willing to short their own positions, in order to gain the cost of insurance coverage?

Simple.

What is the difference between an insurance company and a bank?

Absolutely none.

How do banks make money? Fractional reserves.

When the downturn in 2008 occurred, what is it that had occurred with the banks, versus what had occurred with insurance companies, such as AIG? Books will, and have, been written. For me the bottom line is, AIG took risks that it shouldn't have taken. There were investors and economists that warned the entire housing industry, from banks, to mortgage companies, to insurance companies, that the promises of federally guaranteed loans were going to find themselves under water.

The point is, we knew that the policies of the federal government were leading us to a place where the promises we had made to our citizenry were no longer affordable, and yet, we lacked the courage to tell those who voted for our politicians, that the breadboard was bare. A Mother Hubbard redux.

So, to repeat, how do banks make money? Fractional reserves.

In my take on reality, the most important question that needs to be asked about current government law, policies and planning, is what effect are those exogenous variable going to have on insurance companies, and why is it that the most brilliant economists are hired by insurance companies? Small shifts in exogenous variables can impute huge increases in profitability by the companies engaged in economic activity within the markets described by those variables.

Let's re-state that. If you are a large insurance company, you are going to be receiving millions, hundreds of millions, and yes, billions of dollars in the simple quest to cover against loss. You give me a percentage of the value of your possessions, and I'm willing (as an insurer) to cover you against accidental loss for the full price or cost of those possessions, for a fraction of the value of those possessions. You pay me a fraction, I'll make you whole.

This is insurance.

And the dumber you are, the more risk you assume.

The richer you are, the more assets you have, the lower your costs of insurance are going to be. You may end up paying more for insurance than someone with a lower income, but the more you pay, the better protected you are going to be. And as a percentage of income, you can afford comparatively cheaper insurance. Billionaires pay proportionately less for coverage than you and I.

Can you figure out why?

Moving on.

Banks make money due to fractional reserve banking. Banks do not need to hold in their vaults, the entire value of the deposits held, as a liability of the bank. For those with basic bookkeeping, assets equal liabilities plus equity. Would you expect your Savings and Loan to have all the cash deposited in your local S & L standing in your S & L' s vault? Of course not. If you've been induced to deposit your cash in an S & L, part of the marketing of an S & L is in the argument that S & L's typically are lending sources for you and your neighbors; small loans for auto and appliances, large loans for homes. S & L's had for years an advantage for this type of lending, not seen since the passage of the deregulatory bill in 1983. Changes in tax laws, changes in regulation have all contributed to the decline of S & L's. But the reality of small banks, S & L's, credit unions still exist. None of these depository institutions maintain on hand an hundred percent of their depository obligations. If you deposit an hundred dollars into any financial institution, only a fraction of that deposit will be held, on hand.

Remember "It's a Wonderful Life"?

Jimmy Stewart finding out that he couldn't meet the payment demands of his correspondent bank?

Remember, this scene took place before the FDIC was established.

But think about it. "It's a Wonderful Life" wouldn't have been a picture without one crucial scene; the theft of payment.

And then the movie goes on. The "rich" guy is corrupt. Unquestionably. Just as are so many of us. Including Jon Corzine. The bundler who lost millions, and still hasn't been indicted by the Obama Justice Department. MF Global is one of the most egregious examples of "Potter" in recent history. But...nothing.

Insurance companies hired on early in the debate over public health care. Obamacare. Why?

Because, insurance companies hold fractional reserves against their possible liabilities, just as do banks. But most of us never look at our insurance companies as having the same fiduciary responsibilities as we do the banks we deal with. And that's not an intelligent position to take.

Of course insurance companies have the same responsibilities and liabilities as banks. But you never hear our President railing against the insurance companies.

Why is that?

Because of ObamaCare.

ObamaCare is the biggest shift in assets, from personal to corporate, than has ever occurred before in the history of the world.

Remember, that banks don't hold your deposits in a vault. They only hold a fraction of their liabilities in their vaults, and have determined that there is only a percentage of what they owe, that will ever be demanded, on any particular date. Bank runs are dangerous, since a bank run would mean that all depositors would be asking for all their cash at a single point in time. (No wonder poor George argued against the bank run in the video above!)

Insurance companies, however, are a little bit different. Not being a bank, the beneficiaries of an insurance company are different from other holders of equity. We're all aware of our FDIC insurance. What insurance do you have against the payments paid for an insurance policy, in the event of your insurance policy holder's failure? What is the limit of the liability of such a failure?

I think I have given you a lot to think about. You own some insurance, whether it's only automobile, or homeowner' s insurance. If you own a company, or invest, there are other types of insurance available. Imagine, you own a portfolio of mortgages. Can you find insurance against loss for that portfolio of mortgages?

Would you be surprised to find out, that you can insure yourself against loss against a portfolio of mortgages that you own? And, wouldn't you expect that someone would be willing to insure you against loss for that type of portfolio?

Friday, July 27, 2012

The horror has begun. I live in a rural county, where real jobs are hard to find. Due to our proximity to the ocean, there is a lot of land here that is admired. This county has had environmentalists halt development of rare, recreational uses, due to concerns over such things as sand dunes. Building too close to a sand dune is a bad thing, I've found out, especially if the "building" was a putting green.

The real horror is the changes that have taken place in banking laws.

Living in a rural market, with depressed housing values, a shrinking business community, has led to businesses with loans finding themselves "under-performing" under the new rules created by our Congress, after the latest let-down in 2008. In order to protect "us", the American public, from unregulated Banking Operations, rules have been put in place that prohibit banks from using their discretion in determining whether or not a loan to a business is acceptable, or not.

Today, my best friend lost his multi-million dollar business, due to accounting rules.

It isn't my friend who lost out. It was his customers who lost.

He carried a segment of our community after the downturn of 2008. The guys who built homes. He carried them, and then, when the slope of debt and payment was finally turning, bank regulations killed him.

Whenever you hear that we need more regulation, remember my friend. Banks should do, what banks should do. Bread makers should do what bread makers do. Government should do what they do best.

Roads, defence, postal service.

Beyond that, government is an hindrance, not a solution.

Government regulation has helped us deal with certain problems. Excessive air pollution? Excessive water pollution? Sure. Because of differences in states' laws, water and air pollution were issues that needed federal intervention. But federal regulation has gone out of control. When federal regulations of a regional bank can kill a local company based on rules out of Washington, D.C., then the power of federal regulators has been expanded past the diminishing values of the regulation. That is, the costs to society have increased against the value of the supposed protection of the regulation.

And it isn't just banking where this is happening.

When you hear someone complaining about the costs of regulation, it isn't just banking, or retail, or mining, or manufacturing. The costs of regulation are imposing costs on customers, on investors, on employees. We are driving down employment, increasing costs for building new products, and killing entrepreneurship.

For what?

Lower risks?

Government regulation hasn't ever, ever, ever, solved a thing. Thieves prosper because they are thieves. Government regulators prosper because they are government regulators. Has a single death ever been prevented due to regulation of guns, murder, being a dick or being stupid? People die from all types of causes. But have a gun involved, a car, alcohol, then: let's pass another law. Killing someone has always been a crime, back unto the days of Cain and Able. And yet, we find the loudest voices calling for new legislation prohibiting killing someone for some reason.

Why haven't we solved the problem of murder? Why wasn't this problem solved three thousand years ago?

The end of murder, theft, cheating, embezzlement? Why is it, at this moment in time when we are being confronted, for the first time, with these human weaknesses?

Why is it, that we need to re-discover the truths our Founding Fathers had been cognizant of, when they were facing the problems that we face today? Is there a role for writers, such as Locke and Augustus, in our lives, today?

Schools don't teach Aristotle, Plato, Descartes, Hume, or Galileo. Men who observed simple truth, and said, "here is a simple, observable truth. Deny it." There are things that are undeniable, and yet today, undeniable truths are being found to be objectionable. Take the recent unpleasantness of being gay. A kid was denied his participation in a Jesuit program for minorities, since he found himself unable to accept the teaching that being homosexual was the same thing as being heterosexual.

We are told every day, that gays being married is just the same as heterosexuals being married.

I guess that it is pretty easy for someone who has no sexual distinctions to find the above assumptions valid. But what if you find that you have certain sexual distinctions? A majority of people do find themselves able to ascertain their sexual distinction. When it comes to mating, a preponderance of participants find themselves drawn to persons of distinctly different sexual preference...or what may be called, "gender."

Boys have dicks, and girls have pussies. Two dicks are one too many, and two pussies are a dream.

What is a visceral reaction for most seems to be indictable for the gays. Whether it's a coach at Penn State, or a volleyball coach at the local high school, the problem is, gay behaviour isn't the norm, it isn't acceptable, and it isn't normal. But the question of how we've come to a pass, where gay behavior is as acceptable as inordinate banking regulation ends up being the product of a societal belief that the arbiter of what is fair, or unfair, must necessarily be the government.

The horror lies, in letting someone else decide for you, what is right or wrong.

We can't vote on what is right or wrong. You face that decision eleventy times each day. You don't think about what laws, regulations or rules have been written; you think about what is right. As is your God given gift.

The horror is that, you've been told that you can't decide for yourself what is wrong or right, even though the greatest impetus has been found to be that which you decide for yourself, from Aquinas to Einstein. The truth cannot be hidden. If you find yourself condemning people who decide for themselves what is true and what is not, to what school of thought do you find yourself adhering? What are the rules for you, if you find yourself decrying found truths of anyone else?

We'll take care of you. Vote for me, and you'll be assured of a future. How can something as valueless as a vote assure anyone of anything? There's only one thing that will take care of you; your self. And never forget it. Have you made plans for when your worst nightmare takes place? I have. It isn't pretty, but things will get by.

If you don't have a plan, mebbe it's time to think about it. Or, better yet, simply vote. Simply vote to allow us, as adults, to take care of ourselves.

It's radical, but it's what America was built upon, since its inception. It's not Obama's vision of hope and change. And for me, that's what makes it workable.

Tuesday, July 17, 2012

CNBC doesn't allow for embedding. Open the link below in a new window, and follow along with the transcription. It's worth your while, if only to give yourself a fundamental starting point in terms of how economists define national income accounts. If you have any questions, feel free to ask.

It isn't the answers you don't know you should ask for that should bother you. It's not knowing how to ask those questions that would lead you to answers that you should know that you should be bothered by.

http://video.cnbc.com/gallery/?video=3000103277

good evening, i'm larry kudlow. this is the kudlow report. the top story tonight is the economy. retail sales are down for three straight months. normally that's a recession signal. for the sake of the country, i hope i'm wrong about the recession. our experts will weigh in and we'll preview ben bernanke's critical mid-year testimony coming tomorrow on the state of the economy and fed policy. also this evening, instead of trying to anti-depressant off for a session the president is in full election mode, once again demonizing business. take a listen. if you've got a business, you didn't build that. somebody else made that happen. well, economic -- kelly, too. the dow closed down on the lousy economic news. it's the 7th down day in the past eight. the new york times article alleging analysts with ethically dubious behavior once again suggesting the stock market may be rigged against the little guy in favor of the big guys who get the key research first. gretchen morgenson is my exclusive special guest. the big news today, the drop in retail sales, the third consecutive drop caused major recession fears. i think the drop in sales is closely related to the slow down of jobs. lononfarm employment. you will see the same decline down to 75,000 a month. fewer incomes. lower incomes. you will have people spending less. now what does it mean to gdp which is the ultimate recession indicator? take a look. hold onto your hats. a simple formula. gdp equals consumption, c, investment, i, that's housing and business investment. the g is government spending which has been faltering and x minus m is trade. that means we import more than we export. the proportions, consumption is 70% of the demand side, 15% investment. 18% is government spending and minus 3% for the trade sector. add them up to 100%. retail sales are about 40% of the c, that's a big number. in fact, retail sales overall are about 28% of gdp. so you have more than a quarter of the economy falling for the third consecutive month. that gets everybody worried. people are talking about 1% growth in the second quarter ending in june. that's less than half of the first quarter which is 1.9%. the question is are we going into recession and is this a trend for the rest of the year? now we bring in our distinguished panel to discuss. joining us now we have macro strategy president dave goldman, joe lafornia and cnbc contributor, diane swonk from mesirow financial. i don't want a recession. let me say it off the top. the numbers worry me. i hope i have the analysis remotely right. what's your take? will it be worse? what happens in the third and fourth quarter? i hope it's not a recession as well. we are close to a stall speed. the risk of recession is the highest since the on set of the financial crisis because of what's going on in europe and the fiscal cliff in the u.s. clearly the jobs picture is back from the unseasonably. you still didn't have people on discretionary spending. food and drink con tracked which is important because many people were hoping lower energy prices would allow people to spend a little more on discretionary things. that didn't happen. that could be the only saving grace. that's a very important point. you have the big tax hike staring us in the face. what about retail gasoline? it's gone nationwide from about $4 a gallon down to $3.40. de facto tax cut. that's helping us. it is one of the automatic stabilizers out there. you're right. employment numbers have been lousy. that's a generous number for the employment numbers. uh'm looking for 2 to 2.25% in the second part of the year. that's becoming my optimistic forecast with a lot of down side risk. it's muddling along at best. dave, uh want to ask you about q-2. will it be a negative number, positive, 1% number? then i want to go to the third and fourth quarters. i think we squeak by at 1%. we kind of have a digital outcome with the selection. as we have discussed we saw in the first quarter a breakdown in the investment machine. we have more profits than ever, but the profits are going into mattresses, not into the kind of things that create jobs. no investment, no jobs. no jobs or retail spending. we have seen under obama's watch the average family has lost about 40% of net worth. so the incentive to save and rebuild net worth is powerful. with those huge headwinds we barely squeak by. if obama is re-elected we have recession in 2013. joe, i interviewed alan greenspan last week. an interesting point. he was not predicting recession. but he said because of the massive deficits we are facing for a variety of reasons, health care entitlements, you name it. people worry we can't pay our bills, that we have to jack up taxes. joe, greenspan said people aren't making long-term investments in structures, factories. they are not buying homes for the long run. this is holding back employment and this is why sales are slumping as we see today. is greenspan right? how big a problem is this going to be? certainly he's onto something if you talk to business people. they say the same thing. they say the fiscal cliff is an inhibitor to hire. if we look at the university of michigan consumer sentiment data we see the very weak readings on sentiment largely reflect a lack of confidence in government policies as they are generally defined. i think he's onto something. it's hard to quantify. diane is right. we have a muddling through environment. because the corporate sector is healthy enough, i don't think we'll have a recession. we'll muddle through, get 2% growth. hopefully some clarity after the election will give us activity. i don't see the 2% growth. larry, at one -- 1.9% growth in the first quarter. you may have mentioned it, diane. a lot of people are marking down second quarter growth to 1%. you know better than i know 1%? heck. that's just above the tree line. barely above water. it's a stall rate. anything goes wrong, inventory correction, a weird thing in europe or china could sink us. i spent the last week with 25 economists from around the world representing much of the world economy. all of us were more scared than we have been since 2008. that said, it does look like china will jack up growth by buildingot l a of bridges to nowhere. not the most productive way to do it but they can generate gdp. that's important. i think we are going to see -- we have seen investment revised in the first quarter. investment isn't near where it should be but i see the economy as the flip side of the 1990s. ironic for greenspan. we had a period of irrational exuberance, quoting alan. robust growth. so much certainty about the future we were willing to invest in companies without revenue let alone profits and throwing all caution to the wind. we have the flip side of that y. we have subdued growth and uncertainty regarding policies in europe, in the u.s. both parties are guilty on this. last year at this time we grew under 1% with a 20% contraction in the second part of the year. we had to down grade and the economy accelerated to above 2%. the notion that we can't get above 2% is mistake. that's still possible. i'd like to see it. i'm waiting. david, one thing that's good. banks are making loans. that's from your own last report. ben bernanke urged the banks to loosen the strings more. why does he have to keep paying 25 basis points on the excess reserve bank deposits sitting lying at the fed. why not do what the european central bank does and stop paying 25 basis points and maybe get banks to push the money out more throughout the economy. people aren't short of money to invest. when greenspan. they revised it. it's now 1.7. well. investment was three times profits. now it's around one times profits. lowest level of profit since 1947. that's lack of spirits, and a hostile environment. i think we are stuck at 1%. i want to sell this and i'm not having luck. i don't think the fed should pay interest on the unused bank deposits. there is one and a half trillion dollars worth. let them stop it. maybe they will push out the money. the european central banks stopped paying money on unused deposits. why doesn't the fed? the pro with the banks is you have a regulatory onslaught. the fed of course taking volatility out of the market, lower the long end hurts net interest margins. a lot of things are just beyond the rate of excess interest paid on reserves holding us back. it's really much more regulatory than anything on the monetary policy front which i wish the fed appreciated more. it's not as much of ap issue. talking to my european banking friends they are envious because they think it is a good deal on regulation which is scary. bank loans are growing. most are student loans. i hear that we are not going into recession by the skinny skin skin of our teeth. david goldman, joe lavornia and diane swonk, thank you. coming up, is the stock market

Saturday, July 14, 2012

The inflammation that occurred was new. One ship, due to the troubles of the Officer of the Deck, foundered. You can blame Captain Hazelton as much as you wish, the problem is, the Officer of the Deck failed to follow the course charted. Let's assume I'm drunk now. The words you're reading are the words of a drunk. Does that make the truth, the honesty, or the accuracy of the words I'm typing false? If I'm Captain Hazelton, leaving the bridge, giving orders underway to the Officer of the Deck any more or less important?

Maritime law is a special province for legal professionals. Contract law is, again, a special province for legal professionals. Why? Because so much of maritime law relies upon international agreements, and contract laws simply derive from the country in which those contracts are created and agreed. Regulatory change doesn't always come from regulating agencies. At times, regulatory changes come from courts. Should courts engage in regulatory change? Taking a look at the Constitutional roles played by the Courts, the Executive and the Legislature, it's obvious to the casual reader that regulatory changes can only occur in the Legislative branch of government. That is, only one branch of government creates, or proposes, law. The Executive's role is in the administration of that law, and the Court's role is one of ensuring enforcement of the Law.

If you were to be involved in insurance, what role would you play? Purchaser, provider, or underwriter? The most common role of participant in the market for insurance is as a purchaser. Concomitantly, to be a purchaser requires as a necessary component, a provider. What both parties rely upon is the underwriter.

Underwriters asses risk.

During World War II, thousands of ships carrying oil were sunk. If you were a crewman on a ship carrying oil during WWII, the idea of being sunk was not an attractive thought. No one wanted to be sunk at sea in the Northern Atlantic. But worse, the thought of fire starting on the oil floating on the water...when all the water around you was soaked in oil. Temperatures of burning ships reached hellish levels, and the men who were finding themselves abandoning ship found themselves entering the gates of Hell. The shores of Nova Scotia, England and Ireland, France, and United States' states of New York, New Jersey, Georgia, North and South Carolina, all were victims of sinking which were occurring daily during the years from 1939 to 1945. Hundreds of millions of barrels of oil were spilled in the Atlantic during those years.

One account lists 1554 ships under U.S. flag were sunk during WWII. That's just U.S. merchantmen. Add in German, French, British, Australian, Chinese, Indian, ships from all corner of the world, and you see that this is simply a tip, if you will, of an iceberg of incomparable size.

When the Exxon Valdez found itself grounded due to a navigation error, 260- to 750-thousand barrels of oil were spilt. So, twelve million gallons. Or, about 789 swimming pools. We were told that the Exxon Valdez spill was the largest disaster of its kind. Which is demonstrably false. But headlines lead. And regulations change.

The Exxon Valdez is important in many ways. Regulations over ships' construction, regulations over ownership of vessels, regulations over implicit and explicit liabilities of carriers and contractors, all were changed within years, and most of these changes occurred outside of the legislative process. Those who would assert that "regulation isn't affecting commerce" are simply without any exposure to the real world of commerce. The whole concept of corporate law was affected as a result of Valdez. There is no longer an "arms length" available to charterers of ships, and in the main, when you rent or contract for carriage, you need to look at the rules promulgated after Valdez and then ask yourself, if you, or your company are truly divorced from the actions of your contracted providers?

Not all changes in regulations occur in the offices of federal or state bureaucrats. Some of the most significant changes, and I would assert, the most onerous changes in regulation, have occurred in the court system.

Within recent memory, the bankruptcy of General Motors should be at the fore-front. Secured holders of equity were bitch-slapped by the Obama administration in favour of the unions which support the Democrat Party. I haven't yet heard of any court case where the flaying of our nation's bankruptcy laws were taken to a court, and hear pleadings on either side. Whole chapters of law were demolished due to the abdication of the Courts. The recent Roberts' Court rulings on ObamaCare aren't the first examples of judicial malfeasance. Simply, the most recent.

The last few posts have been meant to be illustrative of the ways changes in regulation can or may occur. I think the knee jerk supposition is, that bureaucrats in Washington, D.C. are the villains in the piece. They are, and in ways that are nefarious and at times, invisible. But insurance companies are able, in the main, to pace those types of changes. (Although, it must be said, that the acceleration of regulation, and the volatility those changes have had, have led to an abrupt acceleration of bureaucratic regulation during the present administration.) Insurance companies' underwriters can attempt to read tea leaves when it comes to important judicial decisions. But as we've found, Courts are not predictable. The actions of courts can be the most expensive components in determining future costs, compared to legislative or regulatory changes.

The consequence of Exxon Valdez was profound. It is easy to say that requiring all vessels to be double-hulled is only "common sense."

Common sense, to whom? Coming from a common historical experience, losing millions of gallons of crude oil has never been know to create any type of long-term harm. It has been known to create millions of short-term pictures. And angst. But requiring an entire fleet of ships to change hull design? In a penstroke, judges created costs associated with the carriage of crude oil that have been passed on to you and I, the consumers for bulk oil Is the likelihood of environmental disaster different today, than it was before Exxon Valdez?

Friday, July 13, 2012

Last time we looked at insurance, we ended with several questions unanswered: How does regulation drive up costs? And lower benefits to insurance subscribers?

Back in the original post, we looked at ships' insurance. If we had a thousand ships, and each ship paid a thousand dollars for insurance, how much money would the insurance company have? One times a thousand is, a thousand. A thousand times a thousand is a million. A million times a thousand is a billion. Remember this scaling when you have any conversations about fiscal matters. How did we reach a point where being a billionaire is a big thing, but our government spending "trillions" of dollars isnt'? How many billions does it take to make a trillion?

To answer the question, then, a thousand thousand is a million dollars. Let's take for example, one of the world's most beautiful ships, the Cutty Sark. She was built for a cost of
£16,500. If an actuary were to assess the potential loss facing the owners of the Cutty, they would assess the owner of the ship a fraction of the ship's cost, to cover the potential loss of the ship due to certain circumstances, among which would be pirates, foul-weather, and acts of war. Given the conditions of loss, there might be certain limits of coverage for the loss of the vessel. Additionally, there might be coverage for the value of cargoes carried by the ships, and they, in turn, might be limited in loss coverage due to the circumstances of the loss.

The key to successful marketing of insurance coverage wasn't the promise of safety from loss. If you or I were unprepared to provide another with an hedge against loss, you or I might ask for a bond in the full amount of value of the asset. Give me the full value of your article, and if there's a loss, I'll return the value of the loss to you.

Not really a great hedge, is it?

If you could insure against loss, for a fraction of the value of the item insured, would you then be interested in purchasing an hedge that would provide making you whole, in the face of loss? And what, in the word's of President Obama, would be a reasonable betting line against loss? Let's not dawdle over the understanding of the world's smartest man. The simple explanation is, there are guys out there, in the world today, who do a thing called math. I know it isn't sexy, and for certain sectors of our population, the mere mention of mathematics is a game changer...don't go there.

If a thousand ships set sail, and 999 return after a year's sailing, then the loss of a ship is how likely?

If a thousand ships set sail, and 999 return after ten years of sailing, then the loss of a ship each year is how likely?

If we take a thousand dollars for a thousand ships, for ships that cost $25-thousand dollars, what is the apparent liability for the insurer, when in a year a thousand ships sail, and 999 return? (I'm doing a math thing with the Cutty at £16,500 being equivalent to $25-thousand bucks.)

It shouldn't take a math wizard to note that an insurance company with these defined rates against these defined risks, would be doing very well! Very well, indeed!

So, a market like Lloyd's offers insurance. The market is profitable, and if fact, extremely profitable (under the conditions cited.) But Lloyd's isn't an insurance company, it is a market. Certainly, a market with stringent requirements, but with Lloyd's is a group of insurance underwriters who represent investors in insurance and reinsurance firms. Proposing a request for insurance coverage to Lloyd's elicits a response from the Members, who on their own, judge the potential costs against possible claims arising from the queried insurance proposal. The ships owners of the Cutty Sark would have asked the market for insurance, and then had received various quotes from members, from amongst which would have been chosen the most favourable of terms and conditions for the sum of protection against loss being offered.

Within the very dynamic of Lloyd's was the competition amongst the members to gain access to a contract to provide insurance coverage. (Lloyd's was the first insurance exchange.)

All of these market forces were at work, amongst competing members of the exchange, to provide a guarantee of coverage, at the best terms, and at the lowest possible prices. .

Enter the conditions above; regulation. What are the effects of regulation? The market of Lloyd's is illustrative of the temptations toward regulation. A study of Lloyd's would be a starting point for any legislator who wished to impose regulation upon any industry.

Ship owners were required by law (regulation) to provide for the loss of sailors to their families. Ship owners were amongst the first employers who were required to provide payment for loss of life to survivors. In fact, many, if not most, conscriptees into the United States military were surprised to find that their lives were being insured on their behalf by Uncle Sam. Insurance against loss of life is a fairly new invention. An hundred years ago, people died. That was it. Their heirs inherited, life moved on.

Enter the Death Tax. In 1916, America introduced the Inheritance Tax. Then, further regulation introduced another tax, the Gift Tax. Simply dying wasn't enough. Progressive reform meant that the wealthy, even in death, had more than that which those who hadn't, deemed to be excessive. Life insurance was instituted to cover the shortfall in the value of an estate, and the penalty of death under the newly established estate taxes. And, only the wealthy opted to provide themselves with coverage. When young military conscriptees were introduced to their first insurance policies, many of them couldn't understand the value of the policies being provided. They were all coming home, after all.

From the farm, where people simply died, whether from getting kicked by a horse, getting mauled by a cougar, lost in the woods, broken leg while plowing, to a moment where loss could be indemnified generally was a stretch. It was an expense that couldn't be afforded, since most people were dealing with subsistence issues; enough money to eat, to clothe themselves and their families, provide housing. The pinch in life insurance was prompted by a change in tax laws for the rich. Most Americans weren't affected by inheritance taxes.

But the supposed theme of this post is, when regulation changes affect changes in costs for insurance. The regulation that imposed costs for the wealthy, increased the costs of insurance for the wealthy. The wealthy looked at inheritance taxes, and immediately looked for ways to indemnify themselves from loss. What any successful hedge would attempt to do. For most people, the cost of insurance wasn't a consideration; when they died, their estates were passed onto their progeny. Life insurance was a rich man's tool. Government payments for the loss of life during the wars introduced the idea that a man's life could be viewed as an asset, against which the loss of that life could be insured against.

For me, the introduction of insurance of any kind occurred in Junior High, when I signed up for extracurricular sports. As a part of playing football, I received a card explaining that I was covered for certain losses: an eye for $200, or $500 for both, that kind of thing. The card listed my coverage for one finger, one toe, an arm. Being a kid, I totaled all the potential losses and decided that one arm, one leg and an eye was the most I'd be willing to lose.

I, like millions of other kids who played sports, never lost anything. (Drat!) We never cashed in on the loss of limb insurance provided us. But, again, most ship owners never lost all their ships, all their crews, all their cargoes. (Drat!)

Let's leave this line of thinking before the idea of insurance fraud pops up.

Let's simply talk about actuarial tables. Maybe, you've never heard the term. Actuarial tables are really cool, and simply take all the available data on loss, whether its shipping loss, loss of arms playing football in junior high, or probability of death of old rich guys, and susses out where you, as an individual against the backdrop of all these statistics, stand. Insurance companies have gazillioins of statistics. (Yes, I looked briefly at a career as an actuary. The numbers are truly cool. And, my second oldest sister had a career at one point, working for the actuaries of Standard Insurance, a Portland company. Her job was cool, at least to me.)

Simple coverage for intramural athletics is easy to figure out. Put out ten thousand policies, and see how many claims there are. Put out fifty thousand policies, and see how many claims there are. Put out a million policies, and see how many claims there are. With a million policies at ten dollars each--prepaid--how many claims for an eye could be claimed before the insurer lost money? That's like 50-thousand one-eyed kids! Per year! If there were a sport claiming that many eyes, how long would that sport last?

When an activity becomes too risky, normally, the activity declines in popularity. Not always. But, that's for a later post.

Actuarial tables determine costs for insurance. The likelihood of an occurrence. My old stat prof used to tell the joke of the prof who was awarded an honor, but who refused to fly to New York to accept the award. The story goes, that the likelihood of the plane being a victim of a hidden bomb was too great, although slight, for the professor of statistics to fly. On the day the members of the Statistics Department were making their way onto the flight to take them all to New York, they turned and saw the reluctant professor waving his arms, asking them to hold the plane. As he boarded he was asked, "what changed your mind?" The professor said, "the chances of a single bomb on the plane was too great, but the chances of their being two bombs, was insignificant." And, at that point, pulled up his jacket and revealed another bomb.

That isn't the way statistics work, nor how statistical inference works.

Insurance, rather than projecting the worse case scenario, often invokes the best case scenario, in fact, without the best case scenario, insurance couldn't survive. Given leave to itself, insurance would do exactly what it is intended to do; give the purchaser an hedge against unforeseen outcomes. But actuary tables can't predict changes in regulations. Regulations come from legislatures, and the causes for legislation don't often, or at all, reflect the realities of those who wish to manage their exposure to risk.

Let's take a look at the Exxon Valdez. And changes to maritime regulation.